I have been arguing (“Euro Exit”, 2012) that the best way out of the
deflationary policy of “austerity” imposed to Eurozone countries by the German
government is a substantial devaluation of the euro against the dollar and the
yuan, around or under a one-for-one pricing, whereas the exchange rate is still
fluctuating today around 1.26 dollars to the euro. Such a depreciation would
return many of the “GIPSIs” (Greece, Ireland, Portugal, Spain, Italy) to
competitiveness (more exports and less imports from out of the zone countries)
and moreover would open a window of opportunity for a low cost exit from the
euro and a return no national currencies, since the burden of debts in euros
would be reduced accordingly at the same time. Exiting the euro would prove
necessary anyway in order to realign intra Eurozone exchange rates to an
approximate equilibrium value that would take into account the cumulative
divergence of unit costs and prices between the southern members and Germany
during the 1999-2012 period.
An argument often used however in favor of the euro, and a euro as
strong as the DM, by bankers and eurocrats is that the German opinion is
acutely remembering that a reduction of external debt by devaluation has been
leading to hyperinflation in the 1920s, and as a consequence to the destruction
of the middle class, and then Nazism.
They are wrong on two counts: first, the present international
environment is resolutely non inflationary, in spite of the huge amount of
money created in the world by US “quantitative easing” policy. The
globalization phenomenon has brought in a massively increased supply of goods
and services from the emerging economies so that more money is chasing more
goods, and the perspective of inflation is still remote for the moment. A devaluation therefore is not likely to boost inflation much. And
second, their claim is historically wrong: the rise of the Nazis was not in the
1920s crisis but followed the 1930s Great Depression that hit Germany most. The
share of the Nazis in the votes stayed at a low level throughout the 1920s (a
few percent) and then rised massively in the 1932 elections to more than a third of
the total vote, at the moment when the effects of Depression were being felt.
This point is usefully developed in The Economist "Charlemagne" blog this
week (“Between two nightmares”). In her belief that budget profligacy leads to
political chaos and political extremism, Mrs. Merkel, they write, is drawing
the wrong lesson from history:
“It was not hyperinflation in the 1920s but the depression and mass
unemployment in the 1930s that propelled Hitler to power. Like the hapless
Weimar chancellor, Henrich Brüning, Mrs. Merkel is accused by the critics of
hastening disaster by pushing austerity during a deep recession. But whereas
the 1930s is seared in American memory, it is less clearly remembered in
Germany. The reason, says Professor Carl-Ludwig Holtfrerich of the Free
University of Berlin, is that Germany returned to full employment more quickly,
thanks partly to Hitler’s own form of Keynesian stimulus: notable autobahn-building
and rearmament.
The prospect of a 1930s-like breakdown now is perhaps most palpable in
Greece.”
I completely agree that Greece is a clear example of deflationary policy
leading, in the context of an incoming depression, to political extremism.
But I believe that the reason for German obstinacy regarding austerity
and deflation has much more to do with current factors rather than with
historical memories.
First, the German opinion opposes a “transfer union” and is quite right
to do so since there is no end in view for depression and induced growing
budget unbalances in the GIPSIs, as long as they cannot recover their monetary
independence, and thus economic growth. Second, the German re-export model implies that the concerned
industries prefer to keep in place the euro that gives them an unfair exchange
rate advantage over southern Eurozone countries, and they would significantly
lose profits in case these countries exit the Eurozone. Third, the banks and
the German government gain much from the overvalued, “DM-like” euro, in that
the flow of international capital to Germany, and the zero interest rate that is its result, provide these structural borrowers with ample funding at zero cost.
One has to be reminded that the German government is as heavily indebted as
France is for instance.
Thus, let’s not forget the lessons of the 1930s, rather than those of
the 1920s, on the one hand, but let’s not forget the present rational factors
of the growing conflict between the current Eurozone members’ interest groups.
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